The Effect of Financial Regulation on the Performance of Microfinance Institutions in Kenya

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Abstract

Micro-finance regulation is a form of supervision that subjects Micro-finance banks
and institutions to comply with requirements, restrictions, and guidelines that aim to
maintain the integrity of the sector. The regulation are passed by the parliaments as an
Act which significantly maintain market confidence, protect financial stability, protect
consumers, and regulate foreign participation in the financial markets. The study
adopted a descriptive survey design in which all members of the population where
considered in the sample. The study targeted five Micro-finance banks which are
registered by the Association of Microfinance Institutions in Kenya by June 2017.
The study data was secondary data and obtained from the Central Bank of Kenya
annual reports and specific Micro-finance websites. The data was analyzed using
SPSS and presented using tables and figures. From the study, it was established that
percentage ratio of Solvency increased from year 2000-2008 and reduced from 2009-
2016 due to the introduction of the regulation Act. From the study, it was established
that asset quality improved after the introduction of the Act 2008. The study
established that Micro-finance repayment capacity of the banks increased gradually
from the years on the study. The Client outreach which presented the number of
active accounts within the Micro-finance banks. The study established that the
number of active accounts increased significantly from the 2000-2016. The financial
performance increased significantly over the years under study after the introduction
of the Act. The study concludes that solvency, asset quality, repayment capacity,
client outreach and profitability was significantly affected by the Micro-Finance Act
2008. The study recommends that for the banks to remain profitable, solvent,
repayment capacity and asset quality should strategies on how to increase the value of
assets and reduce the operational expenses and liabilities. To keep high client
outreach, the micro-finance banks must improve on the effectiveness on service
delivery and efficiency in product innovation and development